During the period from the 1940s to the early 1970s a far reaching theory of antitrust liabilitly had developed in a series of cases, mostly, but not always, authored for the Court by Justice Douglas.1 5 7 This theory is now referred to as the leverage theory. It was premised on the misuse of market power and was used in applications of
1 5 3 The agreement requirement of Section One is set out supra, notes 37-38, and accompanying
text.
1 5 4 See generally, Salop, "Practices that (Credibly) Facilitate Oligopoly Coordination," in Stiglitz,
New Developments in Market Structure (Macmillan 1985); Hovenkamp, supra note 26, at §4.6,170-180;
Weiner, "Facilitating Practices: Distinguishing the Legitimate from the Unlawful," 7 Antitrust 22 (ABA Section of Antitrust, Summer 1993).
1 5 5 See FTC v. Cement Inst, 333 U.S. 683 (1948) (holding illegal a combination involving multiple
base point pricing such that for any given locality, the price would be the same); see also Triangle Conduit
& Cable Co. v. FTC, 168 F.2d 175 (7th Cir. 1948) affd by an equally divided Court sub nom., Clayton Mark & Co. v. FTC, 336 U.S. 956 (1949). Base-point pricing is a practice distinct from delivered pricing, which can be justified as having legitimate business purposes. For cases involving delivered pricing, see E.I. du Pont de Nemours & Co. v. FTC, 729 F.2d 128 (2d Cir. 1984); Boise Cascade Corp. v. FTC, 637 F.2d 573 (9th Cir. 1980) (although on the facts, the case, perhaps, presented a basing point scheme rather than merely delivered pricing).
1 5 6 See, ag,, United States v. Container Corp. of Am., 393 U.S. 333 (1969) (agreement to disclose
most recent price offered when requested); ct, United States v. United States Gypsum Co., 438 U.S. 422 (1978) (interseller price verification regarding specific customers); Sugar Institute, Inc. v. United States, 297 U.S. 553 (1936) (exchange of price information and other agreed to practices).
1 5 7 See, ag^, United States v. Griffith, 334 U.S. 100 (1948); United States v. Paramount Pictures,
Inc., 334 U.S. 131 (1948); American Tobacco Co. v. United States, 328 U.S. 781, 797 (1946); Otter Tail Power Co. v. United States, 410 U.S. 366 (1973).
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both Sections One and Two of the Sherman Act and also Section Three of the Clayton Act. The basic idea was that power in one market was used to attain or preserve power in a second market. Thus, one who held a monopoly in one market, for example the result of a patent or copyright, would use that power to force consumers to buy
products or services from the monopolist in a second, potentially competitive, market.
This was said to violate Section Two because the use of the leverage was a predatory use of monopoly power to enhance or augment the monopoly power in the first market and thus satisfied the monopolization/conduct requirement of Section Two. Moreover, under Sherman Act Section One and Clayton Act Section Three, such use of leverage was regarded as clearly an "unreasonable" restraint of trade because it harmed
competitors in the second market.
The leverage theory lies at the heart of many Section Two monopolization cases, most Sherman Act Section One and Clayton Act Section Three tying cases, many vertical exclusive dealing cases, and much of the jurisprudence involving both vertical and horizontal refusal to deal cases. By the early 1970s the Supreme Court had so firmly adopted the theory that many per se violations were premised in part upon this basic idea of increasing market power by leveraging into related markets.
Critics, and then the courts, started to retreat from the more extreme applications of the leverage theory in the mid-1970s.158 The main thrust of the change in thinking involved the recognition that the use of leverage in and of itself could not, in most situations, add anything to market power. It would, at most, only dictate who would get the benefit of the already existing monopoly power.
1 5 8 Actually the criticism started much earlier but began to attract significant attention in the 1970s.
Matsushita Electric Indus. Co. v. Zenith Radio Corp., 475 U.S. 574 (1986); Catlin v. Washington Energy Co., 791 F.2d 1343 (9th Cir. 1986); Alaska Airlines, Inc. v. United Airlines, 948 F.2d 536 (9th Cir. 1991), cert, denied. 503 U.S. 977 (1992). See generally, Bork, The Antitrust Paradox. Chapters 14 & 15 (Basic Books 1978); Posner, Antitrust Law. Chapter 8 (1976); Kattan, "Developments — The Decline of the Monopoly Leveraging Doctrine," 9 Antitrust 41 (ABA Section of Antitrust Law, Fall 1994). Krattenmaker &
Salop, "Anticompetitive Exclusion: Raising Rivals' Costs to Achieve Power Over Price," 96 Yale L.J. 209 (1986) contains an excellent summary of the criticism. See also Hovenkamp, supra note 26, at §7.9, 283-85; Sullivan, "Section 2 of the Sherman Act and Vertical Strategies by Dominant Firms," 21 Sw. U. L. Rev.
1227(1992).
For example, in the Griffith case,1 5 9 Justice Douglas was concerned that the defendant would use its monopoly position in towns where it was the only theatre, to force distributors of films to deal only with it in towns where it faced competition, thus hurting the competitor theatres in those other towns. However, the power in the monopoly towns only gave the defendant so much monopsony power. That power could be extracted from the distributor either in a price concession in that market or in the preferred position in the town where competition existed. But the distributor
obviously would not concede to the monopoly position in the second town if it meant a loss to the distributor that was not outwieghed by some offsetting concession in the first market. Again the monopolist can only extract its monopoly power once. Thus, the argument goes that the total amount of power is not increased. Total output, prices, and power will stay the same, although they may be split differently between the two markets. The leverage has added nothing to the total market power or to the
exploitation of consumers as a group.
The same argument can be made where the defendant has tied two products together.1 6 0 The consumer demand curve for the package constrains the amount of monopoly rent that can be extracted from the tied set of products. If a desire to have the tying product is dependent upon the consumer also buying a tied product, which the consumer would not buy but for the tie, the buyer, as a practical matter, is going to subtract the price of the tied product from that which the buyer is willing to pay for the tying product. Again the use of the leverage does not alter the quantity produced or the total price to the consumer.
The tying requirement can hurt competitors in the second market but in general it does not change the performance that would be produced in the market — the output would not be reduced and prices to ultimate consumers would not be increased as a result of the leverage in most situations. The competitive structure of the market, as measured by performance, would not change. Only the identity of the participants in
1 5 9 United States v. Griffith, 334 U.S. 100 (1948).
1 6 0 See generally, Wollenberg, "An Economic Analysis of Tie-In Sales: Re-examining the Leverage
Theory," 39 Stan. L Rev. 737 (1987).
THE NATIONAL REGULATORY RESEARCH INSTITUTE— 53,
the market would change. Thus the practices might hurt competitors, but not competition.
The Supreme Court, as noted earlier, now articulates the guiding standard for application of the antitrust laws to be the protection of the competitively structured market place, not the protection of particular competitors. Thus, the leverage theory has had to be significantly reworked in recent years. The argument is made that the theory no longer has any validity, but that is too strong a characterization of where the courts are today.1 6 1 In many situations, there is still life in a modified version of the leverage theory.
One reason for its continued validity may be that the critique of the theory
reflects too static an analysis of markets. Markets on both the demand and supply side are very dynamic, constantly susceptible to change. It can be argued that this dynamic nature suggests the desirability of protecting competitors in order to protect diversity in the firms available to react to changing circumstances. In other words, there is benefit to the competitive market place in preserving competitors when that is possible without sacrificing economic efficiencies, even though competitive performance in price and output would not change in the short run. This idea reflects the view that preserving diversity may enhance development of consumer choices over time and this is a value worth protecting unless it means sacrificing current consumer welfare.
Current consumers, however, should not be asked to subsidize inefficient
markets just to protect competitors, as has happened in the past. If such sacrifice is not involved (that is, if there are no apparent efficiencies sacrificed), diversity in the market may be worth preserving as an end in itself. This is obviously a very different rationale than that underlying the populist approach of the Court during the middle of this
century, described above, which was based more on a political view that small, independent business entities should be protected for their own sake.
1 6 1 See Aspen Skiing Co. v. Aspen Highlands Skiing Corp., 472 U.S. 585 (1985); Eastman Kodak
Co. v. Image Technical Servs., Inc., 504 U.S. 45 (1992); Brooke Group; Ltd. v. Brown & Williamson Tobacco Corp., 509 U.S. 209 (1993) (dicta); Berkey Photo, Inc. v. Eastman Kodak Co., 603 F.2d 263 (2d Cir. 1979), cert, denied. 444 U.S. 1093 (1980); Kerasotes Mich. Theatres v. National Amusements, 854 F.2d 135 (6th Cir. 1988), cert, dismissed. 490 U.S. 1087 (1989); Advanced Health-Care Servs. v. Radford Community Hosp., 910 F.2d 139 (4th Cir. 1990).
While the courts today no longer apply the leverage theory generally to protect competitors, it does continue to have considerable force in some situations. For example, tying law under Sherman Act Section One and Clayton Act Section Three is still quite powerful if the defendant has significant market power in the tying product.
However, the courts do now require a showing of that significant power before
condemning the tying arrangements, modifying the per se rule of earlier times to that degree.1 6 2 Even in the Section Two monopolization cases, the courts are probably still reluctant to allow leveraging of market power, unless some good business justification, aside from controlling the second market, is present. Cases turn on the possible consumer or efficiency justification rather than on the leverage power itself.163
Another set of cases in which it is still clearly recognized that the leverage theory may be applicable is where there is some imperfection in the market that does permit the monopolist to add to its power by leveraging power from one market into another.
An example is the Court's analysis of the possible information market imperfection in the recent Kodak case.1 6 4
An example more directly relevant to the public utilities, and thus directly relevant to this study, may occur when price in the monopoly market is regulated so that the firm cannot extract the optimum monopoly rent in that market. The firm may try to leverage its monopoly power into another market that is unregulated, and take its full monopoly rent out in that second market. Here the firm can enhance its total monopoly rent and reduce output compared with what the performance would be if it faced competition in both markets and thus was unable to exploit its monopoly power. This was clearly the underlying situation in the Otter Tail case, although Justice Douglas in his opinion never
1 6 2 See, aa,, United States Steel Co. v. Fortner Enters., inc., 429 U.S. 610 (1977); Jefferson
Parish Hosp. Dist. No. 2 v. Hyde, 466 U.S. 2 (1984).
1 6 3 See, e ^ , Aspen Skiing Co. v. Aspen Highlands Skiing Corp., 472 U.S. 585 (1985); Berkey
Photo, Inc. v. Eastman Kodak Co., 603 F.2d 263 (2d Cir. 1979), cert, denied. 444 U.S. 1093 (1980); Telex Corp. v. international Business Machs., 510 F.2d 894 (10th Cir), cert, dismissed. 423 U.S. 802 (1975).
1 6 4 Eastman Kodak Co. v. Image Technical Servs., Inc., 504 U.S. 45 (1992).
THE NATIONAL REGULATORY RESEARCH INSTITUTE— 55
directly relied upon this approach to the leverage theory in reaching the decision.1 6 5 Alternatively, when both markets are regulated to control the extraction of the monopoly rent, it will not, at least in theory, be possible to extract the monopoly rent in either market.
Yet another line of cases in which the leverage theory may still be alive and well, is the "anticompetitive intent" cases. The Supreme Court has long recognized probable liability where the defendant has engaged in leverage with a clear intent to injure
competitors as part of a strategy to hurt the competitive market.1 6 6 It is the clear evidence of intent here that is critical. If it is truly present, it shows that at least the defendant believes that it is worthwhile to pursue the behavior, so the court can assume that an illegal effect may result.
The difficulty came in being certain of the clear predatory intent. The courts, as well as the commentators, have become very much aware of the fact that such
evidence can be misinterpreted and must be viewed very cautiously.167 It may be difficult to distinguish between utterances that prove predatory, anticompetitive intent, as opposed to the same utterances reflecting healthy, robust competitive behavior.
After all, in both cases the objective is to better one's competitors and take business
1 6 5 Otter Tail Power Co. v. United States, 410 U.S. 366 (1973). The case involved a refusal to
deal. The leverage argument would have Otter Tail trying to enhance its monopoly power over transmission by capturing or preserving control over the retail market. Under conventional economic analysis, Otter Tail could have only taken its monopoly rent once, however, and thus if it was taking it at the wholesale level, or if rates at both levels were regulated, it would gain nothing by controlling the retail market, as well. The wholesale rate, in fact, was regulated by the Federal Power Commission (FPC [FERC's predecessor agency]), but at that time the retail rates were effectively not regulated. The case arose before Minnesota had adopted comprehensive rate regulation at the retail level. Thus Otter Tail could, at least in theory, extract the monopoly rent at the retail level that it was not able to take at the wholesale level, where it has the monopoly, by leveraging its power into the retail market.
1 6 6 Aspen Skiing Co. v. Aspen Highlands Skiing Corp., 472 U.S. 585 (1985); Great Western
Directories, Inc. v. Southwestern Bell Tel. Co., 63 F.3d 1378 (5th Cir. 1995) (involving publication of phone directories), modified on reh'g, 74 F.3d 613 (1996) (damages for future possible violations are not
permitted).
1 6 7 See, ag,, Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574 (1986); Brooke
Group, Ltd. v. Brown & Williamson Tobacco Corp., 509 U.S. 209 (1993); MCI Communications Corp. v.
American Tel. & Tel. Co., 708 F.2d 1081, 1114 (7th Cir.), cert, denied. 464 U.S. 891 (1983); Barry Wright Corp. v. ITT Grinnell Corp., 724 F.2d 227, 233-36 (1st Cir. 1983); cf, Note, "Intent as An Element of Predatory Pricing Under Section 2 of the Sherman Act," 76 Cornell L Rev. 1242 (1991).
away from them. Some courts now limit such "intent" evidence to situations where the behavior of the firm is clearly not in the firm's best interest except by its gaining market power as a result. With that caveat, the intent theory cases are probably still good law.